SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

ý Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended April 30, 2005.

o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to .

Commission file number: 001-31337

CANTEL MEDICAL CORP.

(Exact name of registrant as specified in its charter)

Delaware		22-1760285
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)

150 Clove Road, Little Falls, New Jersey		07424
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code

(973) 890-7220

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý No o

Number of shares of Common Stock outstanding as of May 31, 2005: 14,962,507.

PART I - - FINANCIAL INFORMATION

ITEM 1. - FINANCIAL STATEMENTS

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar Amounts in Thousands, Except Share Data)

(Unaudited)

	April 30,			July 31,
	2005			2004
Assets
Current assets:
Cash and cash equivalents	$	24,651		$	17,862
Accounts receivable, net of allowance for doubtful accounts of $867 at April 30 and $1,372 at July 31	31,840			29,324
Inventories:
Raw materials	6,947			6,632
Work-in-process	2,682			2,065
Finished goods	13,379			13,756
Total inventories	23,008			22,453
Deferred income taxes	2,837			2,806
Prepaid expenses and other current assets	1,807			1,418
Total current assets	84,143			73,863
Property and equipment, net	23,096			22,715
Intangible assets, net	13,402			13,897
Goodwill	33,711			33,330
Other assets	3,006			2,562
	$	157,358		$	146,367

Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt	$	4,500		$	3,000
Accounts payable	9,821			10,325
Compensation payable	4,411			3,450
Accrued expenses	7,915			7,403
Income taxes payable	1,889			2,950
Total current liabilities	28,536			27,128

Long-term debt	12,000			22,000
Deferred income taxes	10,202			7,533
Other long-term liabilities	3,240			3,195

Stockholders’ equity:
Preferred Stock, par value $1.00 per share; authorized 1,000,000 shares; none issued	—			—
Common Stock, $.10 par value; authorized 20,000,000 shares; April 30 - 15,400,845 shares issued and 14,957,286 shares outstanding; July 31 - 15,051,573 shares issued and 14,611,731 shares outstanding	1,540			1,505
Additional capital	57,314			53,315
Retained earnings	40,984			30,193
Accumulated other comprehensive income	5,271			3,145
Treasury Stock, at cost; April 30 - 443,559 shares; July 31 - 439,842 shares	(1,729		)	(1,647		)
Total stockholders’ equity	103,380			86,511
	$	157,358		$	146,367

See accompanying notes.

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollar Amounts in Thousands, Except Per Share Data)

(Unaudited)

	Three Months Ended April 30,						Nine Months Ended April 30,
	2005			2004			2005			2004

Net sales:
Product sales	$	44,370		$	41,575		$	127,689		$	109,251
Product service	6,164			5,323			17,723			15,592
Total net sales	50,534			46,898			145,412			124,843

Cost of sales:
Product sales	27,179			25,811			78,674			68,513
Product service	3,832			3,835			11,179			10,786
Total cost of sales	31,011			29,646			89,853			79,299

Gross profit	19,523			17,252			55,559			45,544

Operating expenses:
Selling	6,007			5,316			17,229			15,017
General and administrative	5,674			5,402			16,491			13,976
Research and development	1,103			1,100			3,109			3,273
Total operating expenses	12,784			11,818			36,829			32,266

Income before interest, other income and income taxes	6,739			5,434			18,730			13,278

Interest expense	353			457			1,202			1,382
Interest income	(134		)	(63		)	(319		)	(128		)
Other income	—			(20		)	—			(49		)
Income before income taxes	6,520			5,060			17,847			12,073
Income taxes	2,711			1,966			7,056			4,611
Net income	$	3,809		$	3,094		$	10,791		$	7,462
Earnings per common share:
Basic	$	0.25		$	0.22		$	0.73		$	0.53
Diluted	$	0.23		$	0.20		$	0.67		$	0.49

See accompanying notes.

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar Amounts in Thousands)

(Unaudited)

	Nine Months Ended April 30,
	2005			2004

Cash flows from operating activities
Net income	$	10,791		$	7,462
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	3,391			3,072
Amortization of debt issuance costs	418			403
Loss on disposal of fixed assets	54			7
Impairment of long-lived assets	—			153
Deferred income taxes	2,957			1,456
Changes in assets and liabilities:
Accounts receivable	(1,576		)	(441		)
Inventories	197			(1,366		)
Prepaid expenses and other current assets	(973		)	(1,267		)
Accounts payable and accrued expenses	622			(388		)
Income taxes payable	(1,060		)	2,109
Net cash provided by operating activities	14,821			11,200

Cash flows from investing activities
Capital expenditures	(2,528		)	(1,400		)
Proceeds from disposal of fixed assets	8			33
Acquisition of Biolab, net of cash acquired	—			(7,782		)
Acquisition of Mar Cor, net of cash acquired	—			(7,979		)
Acquisition of Dyped, net of cash acquired	—			(696		)
Other, net	(378		)	(319		)
Net cash used in investing activities	(2,898		)	(18,143		)

Cash flows from financing activities
Borrowings under term loan facility	—			4,250
Borrowings under revolving credit facilities	—			4,800
Repayments under term loan facility	(5,500		)	(2,250		)
Repayments under revolving credit facilities	(3,000		)	(4,800		)
Proceeds from exercises of stock options	2,518			1,790
Net cash (used in) provided by financing activities	(5,982		)	3,790

Effect of exchange rate changes on cash and cash equivalents	848			835

Increase (decrease) in cash and cash equivalents	6,789			(2,318		)
Cash and cash equivalents at beginning of period	17,862			17,018
Cash and cash equivalents at end of period	$	24,651		$	14,700

See accompanying notes.

CANTEL MEDICAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and the requirements of Form 10-Q and Rule 10.01 of Regulation S-X. Accordingly, they do not include certain information and note disclosures required by generally accepted accounting principles for annual financial reporting and should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report of Cantel Medical Corp. (“Cantel”) on Form 10-K for the fiscal year ended July 31, 2004 (the “2004 Form 10-K”), and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.

The unaudited interim financial statements reflect all adjustments (consisting of a normal and recurring nature) which management considers necessary for a fair presentation of the results of operations for these periods. The results of operations for the interim periods are not necessarily indicative of the results for the full year.

The condensed consolidated balance sheet at July 31, 2004 was derived from the audited consolidated balance sheet of the Company at that date.

Cantel had five operating companies (collectively, with Cantel, referred to as the “Company”) at April 30, 2005 and July 31, 2004. Minntech Corporation (“Minntech”), Carsen Group Inc. (“Carsen”), Mar Cor Services, Inc. (“Mar Cor”), and Saf-T-Pak, Inc. (“Saf-T-Pak”) are wholly-owned operating subsidiaries of Cantel. Biolab Equipment Ltd. (“Biolab”) is a wholly-owned operating subsidiary of Carsen.

Minntech designs, develops, manufactures, markets and distributes disinfection/sterilization reprocessing systems, sterilants and other supplies for renal dialysis; filtration and separation products for medical and non-medical applications; and endoscope reprocessing systems, sterilants and other supplies. On September 12, 2003, Minntech acquired the endoscope reprocessing systems and accessory infection control technologies of The Netherlands based Dyped Medical B.V. (“Dyped”). Minntech also provides technical maintenance services for its products.

Carsen is engaged in the marketing and distribution of endoscopy and surgical, endoscope reprocessing and scientific products in Canada and also provides technical maintenance services for its products.

Biolab and Mar Cor, which were acquired on August 1, 2003, provide water treatment equipment design and manufacturing, project management, installation, maintenance, deionization and mixing systems to the medical, pharmaceutical, biotechnology, research, beverage and semiconductor industries.

Saf-T-Pak, which was acquired on June 1, 2004, provides

specialty packaging products and compliance training services for the safe transport of infectious and biological specimens.

The acquisitions of Dyped, Biolab, Mar Cor and Saf-T-Pak are more fully described in note 3 to the condensed consolidated financial statements.

During fiscal 2004, the Company changed its internal reporting processes to include Product Service with the corresponding product segments to reflect the way the Company, through its executive management, manages, allocates resources and measures the performance of its businesses. Previously, Product Service, which consisted of technical maintenance service on the Company’s products, was reported as a separate operating segment. All prior period segment results have been restated to reflect this change.

During January 2005, the Company issued 5,095,000 additional shares in connection with a three-for-two stock split effected in the form of a 50% stock dividend paid on January 12, 2005 to stockholders of record on January 5, 2005. The effect of the stock split has been recognized retroactively in the stockholders’ equity accounts in the condensed consolidated balance sheets, and in all share data in the condensed consolidated financial statements, notes to condensed consolidated financial statements, and management’s discussion and analysis of financial condition and results of operations.

Note 2. Stock-Based Compensation

The Company accounts for its stock option plans using the intrinsic value method under the provisions of Accounting Principle Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. Under the provisions of APB 25, the Company grants stock options with exercise prices at the fair value of the shares at the date of grant and, accordingly, does not recognize compensation expense. If the Company had elected to recognize compensation expense based on the fair value of the options granted at grant date over the vesting period as prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Stock-Based Compensation” (“SFAS 123”), net income and earnings per share would have been as follows:

	Three Months Ended						Nine Months Ended
	April 30,						April 30,
	2005			2004			2005				2004
Net income:
As reported	$	3,809,000		$	3,094,000		$	10,791,000			$	7,462,000
Stock-based employee compensation expense determined under fair value based model, net of tax	(903,000		)	(360,000		)	(2,002,000			)	(1,071,000		)
Pro forma	$	2,906,000		$	2,734,000		$		8,789,000		$	6,391,000

Earnings per common share - basic:
As reported	$	0.25		$	0.22		$	0.73			$	0.53
Pro forma	$	0.19		$	0.19		$	0.59			$	0.45
Earnings per common share - diluted:
As reported	$	0.23		$	0.20		$	0.67			$	0.49
Pro forma	$	0.18		$	0.18		$	0.54			$	0.42

The pro forma effect on net income and earnings per share for these periods may not be representative of the pro forma effect on net income and earnings per share in future periods.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility and the expected life of the option. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its stock options.

Shares of common stock issued from the exercise of stock options were 47,520 and 345,682 during the three and nine months ended April 30, 2005, respectively, and 324,367 and 455,538 during the three and nine months ended April 30, 2004, respectively. If certain criteria are met when an option is exercised, the Company is allowed a deduction on its income tax return. Accordingly, the Company has accounted for such income tax deductions as long-term deferred income tax assets (which are netted with long-term deferred income tax liabilities) and additional capital in the amounts of $1,434,000 and $285,000 for the nine months ended April 30, 2005 and 2004, respectively.

Note 3. Acquisitions

Biolab

On August 1, 2003, the Company acquired all of the issued and outstanding stock of Biolab, a private company in the water treatment industry with historical pre-acquisition annual revenues of approximately $10,000,000. Biolab designs, manufactures, sells and provides maintenance and installation services for high purity water systems for the medical, pharmaceutical, biotechnology, research, beverage and semiconductor industries. Biolab has locations in Oakville, Ontario and Dorval, Quebec.

The total consideration for the transaction, including transaction costs and assumption of debt, was approximately $7,876,000. Under the terms of the purchase agreement, the Company may pay additional consideration at the end of each fiscal year, up to an aggregate of $3,000,000 for the three year period ending July 31, 2006, based upon Biolab achieving specified targets of earnings before interest, taxes, depreciation and amortization (“EBITDA”). As of April 30, 2005, none of the additional purchase price had been earned.

The purchase price was allocated to the assets acquired and assumed liabilities as follows: current assets $4,230,000; property and equipment $590,000; intangible assets $1,765,000 including current technology $339,000 (10-year life), customer relationships $664,000 (10-year life) and trademarks and tradenames $762,000

(indefinite life); other assets $5,000; current liabilities $1,966,000; and long-term liabilities $1,181,000. The weighted average life of these intangible assets (excluding such assets with an indefinite life) was approximately 10 years. The excess purchase price of $4,433,000 was assigned to goodwill. Such goodwill, all of which is non-deductible for income tax purposes, has been included in the Company’s Water Treatment operating segment.

Mar Cor

On August 1, 2003, the Company acquired all of the issued and outstanding stock of Mar Cor, a private company in the water treatment industry with historical pre-acquisition annual revenues of approximately $10,000,000. Mar Cor, based in Skippack, Pennsylvania with locations in Atlanta and Chicago, is primarily a service-oriented company providing design, installation, service and maintenance, training and supplies for water and fluid treatment systems to the medical, research, and pharmaceutical industries.

The total consideration for the transaction, including transaction costs and assumption of debt, was approximately $8,215,000.

The purchase price was allocated to the assets acquired and assumed liabilities as follows: current assets $3,254,000; property and equipment $947,000; intangible assets $1,483,000 including customer relationships $480,000 (10-year life), covenant-not-to-compete $169,000 (3-year life) and trademarks and tradenames $834,000 (indefinite life); other assets $17,000; current liabilities $2,094,000; and long-term liabilities $636,000. The weighted average life of these intangible assets (excluding such assets with an indefinite life) was approximately 8 years. The excess purchase price of $5,244,000 was assigned to goodwill. Such goodwill, all of which is non-deductible for income tax purposes, has been included in the Company’s Water Treatment operating segment.

The reasons for the acquisitions of Biolab and Mar Cor were as follows: (i) the overall strategic fit of water treatment with the Company’s existing dialysis and filtration technology businesses; (ii) the opportunity to grow the Company’s existing businesses and the water treatment business by combining Minntech’s sales, marketing, and product development capabilities with Mar Cor’s regional field service organization and Biolab’s water treatment equipment design and manufacturing expertise; (iii) the opportunity to expand and diversify the Company’s infection prevention and control business, particularly within the pharmaceutical and biotechnology industries; and (iv) the expectation that the acquisitions would be accretive to the Company’s earnings per share.

The acquisitions of Biolab and Mar Cor are reflected in the Company’s results of operations for the three and nine months ended April 30, 2005 and 2004.

Dyped

On September 12, 2003, the Company acquired the endoscope

reprocessing systems and infection control technologies of Dyped, a private company based in The Netherlands. The total consideration for the transaction, including transaction costs, was approximately $1,812,000 and included a note payable in five annual installments with a present value of approximately $1,211,000 (with a face value of $1,505,000). The Company agreed to pay additional purchase price of approximately $557,000 over a three year period contingent upon the achievement of certain research and development objectives. However, as of April 30, 2005, none of the additional purchase price had been earned and only $453,000 may be earned contingent upon the achievement of the remaining research and development objectives. The primary reason for the acquisition of Dyped was to expand Minntech’s technological capabilities and augment its endoscope reprocessing product line with a new, fully automated reprocessor designed to be compliant with European standards and market requirements.

The purchase price was allocated to the assets acquired and assumed liabilities as follows: current assets $503,000; property and equipment $14,000; intangible assets $664,000 including current technology $585,000 (8-year life) and customer relationships $79,000 (4-year life); current liabilities $777,000; and long-term liabilities $232,000. The weighted average life of these intangible assets was approximately 7.5 years. The excess purchase price of $1,640,000 was assigned to goodwill. Such goodwill, all of which is non-deductible for income tax purposes, has been included in the Company’s Endoscope Reprocessing operating segment.

Dyped is reflected in the Company’s results of operations for the three and nine months ended April 30, 2005, the three months ended April 30, 2004 and the portion of the nine months ended April 30, 2004 subsequent to its acquisition on September 12, 2003. The acquisition of Dyped did not have a significant impact upon sales for the three and nine months ended April 30, 2005 and 2004. However, the majority of the Company’s research and development expenses for the three and nine months ended April 30, 2005 and 2004 were attributable to the Dyped product line. Additionally, such research and development expenses contributed to the overall loss at Minntech’s Netherlands facility for which no corresponding tax benefit was recorded, as described in note 11 to the condensed consolidated financial statements.

Saf-T-Pak

On June 1, 2004, the Company acquired all of the issued and outstanding stock of Saf-T-Pak, a private company located in Edmonton, Alberta with pre-acquisition annual revenues of approximately $5,000,000 and pre-acquisition annual operating income of approximately $1,800,000 for its latest fiscal year ended August 31, 2003. Saf-T-Pak is a designer and manufacturer of specialized packaging for the safe transport of infectious and biological specimens. Saf-T-Pak also offers a full array of compliance training services ranging from software and internet sessions to group seminars and private on-site programs.

The total consideration for the transaction, including transaction costs, was approximately $8,522,000. Under the terms of

the purchase agreement, the Company may pay additional consideration at the end of each fiscal year, up to an aggregate of $3,094,000 for the thirty-eight month period ending July 31, 2007, based upon Saf-T-Pak achieving specified targets of EBITDA. As of April 30, 2005, none of the additional purchase price had been earned.

The purchase price was allocated to the assets acquired and assumed liabilities as follows: current assets $1,341,000; property and equipment $54,000; intangible assets $3,820,000 including current technology $2,035,000 (9-year weighted average life), customer relationships $1,119,000 (5-year weighted average life), and trademarks and tradenames $666,000 (indefinite life); current liabilities $584,000; and non-current deferred income tax liabilities $1,411,000. The weighted average life of these intangible assets (excluding such assets with an indefinite life) was approximately 7 years. The excess purchase price of $5,302,000 was assigned to goodwill. Such goodwill, all of which is non-deductible for income tax purposes, has been included in the Company’s Specialty Packaging operating segment.

The reasons for the acquisition of Saf-T-Pak were as follows: (i) the opportunity to expand and diversify the Company’s infection prevention and control business; (ii) the opportunity for Cantel to enter into the specialized packaging market for the transport of infectious and biological substances, which is a market that has undergone recent government regulatory changes creating attractive market dynamics; and (iii) the expectation that the acquisition will be accretive to the Company’s earnings per share.

Since the Saf-T-Pak acquisition occurred on June 1, 2004, the results of operations of Saf-T-Pak are included for the three and nine months ended April 30, 2005 and are excluded from the Company’s results of operations for the three and nine months ended April 30, 2004.

Selected unaudited pro forma consolidated statements of income data assuming Saf-T-Pak was included in the Company’s results of operations as of the beginning of the three and nine month period ended April 30, 2004 is as follows:

	Three Months Ended				Nine Months Ended
	April 30,				April 30,
	2005		2004		2005		2004
Net sales	$	50,534,000	$	47,976,000	$	145,412,000	$	128,075,000
Net income	$	3,809,000	$	3,222,000	$	10,791,000	$	7,848,000
Earnings per share:
Basic	$	0.25	$	0.23	$	0.73	$	0.56
Diluted	$	0.23	$	0.21	$	0.67	$	0.52
Weighted average common shares:
Basic	14,942,000		14,268,000		14,783,000		14,083,000
Diluted	16,521,000		15,322,000		16,194,000		15,080,000

This pro forma information is provided for illustrative purposes only, and does not necessarily indicate what the operating

results of the combined company might have been had the acquisition actually occurred at the beginning of the three and nine months ended April 30, 2004, nor does it necessarily indicate the combined company’s future operating results.

The results presented in the selected unaudited pro forma consolidated statements of income data have been prepared using the following assumptions: (i) cost of sales reflects a step-up in the cost basis of Saf-T-Pak’s inventories; (ii) amortization of intangible assets based upon the final appraised fair values and useful lives of such assets; (iii) interest expense on the senior bank debt at an effective interest rate of 5% per annum; (iv) bonuses for former owners which relate to distributions of earnings have been decreased to be consistent with Cantel’s management incentive bonus structure; and (v) calculation of the income tax effects of the pro forma adjustments. All other operating results reflect actual performance.

There were no in-process research and development projects acquired in connection with the Biolab, Mar Cor, Dyped and Saf-T-Pak acquisitions.

Certain of the assumed liabilities relating to the Biolab, Mar Cor, Dyped and Saf-T-Pak acquisitions are subjective in nature. These liabilities have been reflected based upon the most recent information available and principally include certain potential income tax exposures. The ultimate settlement of such liabilities may be for amounts which are different from the amounts presently recorded. Settlements related to income tax exposures, if any, would be adjusted through goodwill.

Note 4. Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123, “Share-Based Payment (Revised 2004)” (“SFAS 123R”), which amends SFAS 123. SFAS 123R requires companies to measure and recognize compensation costs relating to share-based payment transactions in the financial statements at fair value. SFAS 123R is effective for all interim periods in fiscal years beginning after June 15, 2005 and therefore will be effective for the beginning of fiscal 2006. The Company is currently evaluating the impact of SFAS 123R on the Company’s financial position and results of operations. However, as more fully described in note 2 to the condensed consolidated financial statements, the Company has disclosed the effects on reported net income and earnings per share had the Company recognized compensation expense in accordance with SFAS 123.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFAS 151”) for the purpose of eliminating any narrow differences existing between the FASB standards and the standards issued by the International Accounting Standards Board regarding inventory costs by clarifying that any abnormal idle facility expense, freight, handling costs and spoilage be recognized as current-period charges. SFAS 151 is effective for fiscal years beginning after June 15, 2005 and therefore will be effective for the beginning of fiscal 2006. The Company does not expect the adoption of SFAS 151 to have a

significant impact on the Company’s financial position or results of operations.

Note 5. Comprehensive Income

The Company’s comprehensive income for the three and nine months ended April 30, 2005 and 2004 is set forth in the following table:

	Three Months Ended						Nine Months Ended
	April 30,						April 30,
	2005			2004			2005		2004

Net income	$	3,809,000		$	3,094,000		$	10,791,000	$	7,462,000
Other comprehensive income (loss):
Unrealized gain on currency hedging, net of tax	633,000			423,000			52,000		250,000
Unrealized gain on interest rate cap, net of tax	—			14,000			5,000		41,000
Foreign currency translation, net of tax	(679,000		)	(1,014,000		)	2,069,000		989,000
Comprehensive income	$	3,763,000		$	2,517,000		$	12,917,000	$	8,742,000

Note 6. Financial Instruments

The Company accounts for derivative instruments and hedging activities in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as amended. SFAS 133 requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in the fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of the change in fair value of a derivative that is designated as a hedge will be immediately recognized in earnings.

Carsen purchases and pays for a substantial portion of its products in United States dollars and sells its products in Canadian dollars, and is therefore exposed to fluctuations in the rates of exchange between the United States dollar and the Canadian dollar. In order to hedge against the impact of such currency fluctuations on the purchases of inventories, Carsen enters into foreign currency forward contracts on firm purchases of such inventories in United States dollars. These foreign currency forward contracts have been designated as cash flow hedge instruments. Total commitments for such foreign currency forward contracts amounted to $17,676,000 (United States dollars) at April 30, 2005 and cover a portion of Carsen’s projected purchases of inventories through July 2006. Under the Canadian Revolving Credit Facility, such commitments may not exceed $35,000,000 (United States dollars) in an aggregate notional amount at any time.

The Company’s intangible assets consist of the following:

	Gross		April 30, 2005 Accumulated Amortization			Net
Intangible assets with finite lives:
Technology	$	8,186,000	$	(1,835,000	)	$	6,351,000
Customer relationships	5,233,000		(1,998,000		)	3,235,000
Non-compete agreements	169,000		(99,000		)	70,000
Patents and other registrations	360,000		(32,000		)	328,000
	13,948,000		(3,964,000		)	9,984,000
Trademarks and tradenames	3,418,000		—			3,418,000
Total intangible assets	$	17,366,000	$	(3,964,000	)	$	13,402,000

	Gross		July 31, 2004 Accumulated Amortization			Net
Intangible assets with finite lives:
Technology	$	7,901,000	$	(1,297,000	)	$	6,604,000
Customer relationships	5,114,000		(1,410,000		)	3,704,000
Non-compete agreements	169,000		(56,000		)	113,000
Patents and other registrations	155,000		(13,000		)	142,000
	13,339,000		(2,776,000		)	10,563,000
Trademarks and tradenames	3,334,000		—			3,334,000
Total intangible assets	$	16,673,000	$	(2,776,000	)	$	13,897,000

Estimated amortization expense of the Company’s intangible assets for the remainder of fiscal 2005 and the next five years is as follows:

Three month period ending July 31, 2005	$	409,000
Fiscal 2006	1,634,000
Fiscal 2007	1,578,000
Fiscal 2008	1,394,000
Fiscal 2009	1,074,000
Fiscal 2010	884,000

During the nine months ended April 30, 2005, goodwill increased as follows:

	July 31, 2004		Acquisition-Related Income Tax Reserve Reductions			Foreign Currency Translation		April 30, 2005

Dialysis	$	8,958,000	$	(257,000	)	$	—	$	8,701,000
Endoscopy and Surgical	207,000		—			12,000		219,000
Endoscope Reprocessing	6,245,000		—			134,000		6,379,000
Water Treatment	9,907,000		—			261,000		10,168,000
Filtration and Separation	2,575,000		(74,000		)	—		2,501,000
All Other	5,438,000		—			305,000		5,743,000
Total	$	33,330,000	$	(331,000	)	$	712,000	$	33,711,000

On July 31, 2004, management performed impairment studies of the Company’s goodwill and trademark and tradenames and concluded that such assets were not impaired.

Note 8. Warranty

A summary of activity in the Company’s warranty reserves follows:

	Three Months Ended						Nine Months Ended
	April 30,						April 30,
	2005			2004			2005			2004

Beginning balance	$	763,000		$	513,000		$	658,000		$	353,000
Provisions	88,000			302,000			574,000			884,000
Charges	(188,000		)	(192,000		)	(574,000		)	(669,000		)
Foreign currency translation	(1,000		)	(1,000		)	4,000			1,000
Acquisitions	—			—			—			53,000
Ending balance	$	662,000		$	622,000		$	662,000		$	622,000

The warranty provisions and charges during the three and nine months ended April 30, 2005 and 2004 relate principally to the Company’s endoscope reprocessing products.

Note 9. Financing Arrangements

The Company’s credit facilities include (i) a $25,000,000 senior secured amortizing term loan facility from a consortium of U.S. lenders (the “Term Loan Facility”), (ii) a $17,500,000 senior secured revolving credit facility from the U.S. lenders (the “U.S. Revolving Credit Facility”) available for future working capital requirements for the U.S. businesses of Cantel (Cantel and Minntech are collectively referred to as the “U.S. Borrowers”) (the Term Loan Facility and the U.S. Revolving Credit Facility are collectively referred to as the “U.S. Credit Facilities”), and (iii) a $6,000,000 (United States dollars) senior secured revolving credit facility for Carsen (the “Canadian Borrower”) with a Canadian bank (the “Canadian Revolving Credit Facility”) available for Carsen’s future working capital requirements (the U.S. Credit Facilities and the Canadian Revolving Credit Facility are collectively referred to as the “Credit Facilities”).

On February 17, 2005, the Company amended its U.S. Credit Facilities as follows: (i) the margins applicable to the Company’s outstanding borrowings were decreased to zero to 0.50% above the lenders’ base rate and 1.00% to 1.75% above the London Interbank Offered Rate (“LIBOR”), depending upon the Company’s consolidated ratio of debt to EBITDA, (ii) the maximum allowed consideration paid for an acquisition was increased from $5,000,0000 to $25,000,000, (iii) a feature was added that gives the Company the ability to increase the U.S. Revolving Credit Facility from $17,500,000 up to $40,000,000 at any time on or before the U.S Revolving Credit Facility’s termination date upon mutual agreement from the lenders and the Company, (iv) certain financial covenants were modified to allow for the potential increased borrowings and capital expenditures, (v) fees on the unused portion of the U.S. Revolving Credit Facility were decreased to rates ranging from .20% to .35%, depending upon the Company’s consolidated ratio of debt to EBITDA, and (vi) the requirement that determined the available borrowings under the U.S. Revolving Credit Facility, which was based upon percentages of the eligible accounts receivable and inventories of Cantel, Minntech and Mar Cor, was eliminated. Therefore, the

margins applicable to the Company’s outstanding borrowings decreased on February 17, 2005 from .75% above the lenders’ base rate and 2.00% above LIBOR to the lenders’ base rate and 1.00% above LIBOR.

On April 30, 2005, the margins applicable to the Company’s outstanding borrowings were the lenders’ base rate and 1.00% above LIBOR. The base rates associated with the U.S. lenders and the Canadian lender were 5.75% and 4.25%, respectively, at April 30, 2005, and the LIBOR rates ranged from 2.27% to 2.96% at April 30, 2005. At April 30, 2005, all of the Company’s outstanding borrowings were under LIBOR contracts.

The U.S. Credit Facilities require the U.S. Borrowers to meet certain financial covenants; are secured by substantially all assets of the U.S. Borrowers and Mar Cor (including a pledge of the stock of Minntech and Mar Cor owned by Cantel and 65% of the outstanding shares of Carsen stock and Saf-T-Pak stock owned by Cantel); are guaranteed by Minntech and Mar Cor; permit the Company to guarantee the lease on Mar Cor’s facility; and expire on August 1, 2008. Additionally, a waiver was received from the U.S. lenders permitting the Company to guarantee the lease of Biolab’s new facility. The Company is in compliance with all financial and other covenants under the U.S. Credit Facilities.

The Canadian Revolving Credit Facility provides for available borrowings based upon percentages of the eligible accounts receivable and inventories of Carsen and Biolab; requires the Canadian Borrower to meet certain financial covenants; is secured by substantially all assets of the Canadian Borrower and Biolab; and expires on September 7, 2006. Carsen is in compliance with all financial and other covenants under the Canadian Revolving Credit Facility.

At April 30, 2005, the Company had $16,500,000 outstanding under the Term Loan Facility and had no outstanding borrowings under either the U.S. Revolving Credit Facility or the Canadian Revolving Credit Facility. Amounts repaid by the Company under the Term Loan Facility may not be re-borrowed.

At April 30, 2005, aggregate annual required maturities of the Term Loan Facility are as follows:

Three month period ending July 31, 2005	$	750,000
Fiscal 2006	5,000,000
Fiscal 2007	6,000,000
Fiscal 2008	4,750,000
Total	$	16,500,000

Note 10. Earnings Per Common Share

Basic earnings per common share are computed based upon the weighted average number of common shares outstanding during the period.

Diluted earnings per common share are computed based upon the weighted average number of common shares outstanding during the period plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price for the period.

The following table sets forth the computation of basic and diluted earnings per common share:

	Three Months Ended				Nine Months Ended
	April 30,				April 30,
	2005		2004		2005		2004
Numerator for basic and diluted earnings per common share:
Net income	$	3,809,000	$	3,094,000	$	10,791,000	$	7,462,000
Denominator for basic and diluted earnings per common share:
Denominator for basic earnings per common share - weighted average number of shares outstanding	14,941,749		14,268,473		14,783,080		14,083,143
Dilutive effect of common stock equivalents using the treasury stock method and the average market price for the period	1,579,229		1,053,769		1,410,981		997,010
Denominator for diluted earnings per common share - weighted average number of shares outstanding and common stock equivalents	16,520,978		15,322,242		16,194,061		15,080,153

Basic earnings per common share	$	0.25	$	0.22	$	0.73	$	0.53

Diluted earnings per common share	$	0.23	$	0.20	$	0.67	$	0.49

Note 11. Income Taxes

The consolidated effective tax rate on income before income taxes was 39.5% and 38.2% for the nine months ended April 30, 2005 and 2004, respectively. The Company has provided income tax expense for its United States operations at the statutory tax rate; however, actual payment of U.S. Federal income taxes reflects the benefits of the utilization of the Federal net operating loss carryforwards accumulated in the United States.

The Company’s results of operations for the three and nine months ended April 30, 2005 and 2004 also reflect income tax expense for its international subsidiaries at their respective statutory

rates. Such international subsidiaries include the Company’s subsidiaries in Canada and Japan, which had effective tax rates during the nine months ended April 30, 2005 of approximately 35.3% and 45.0%, respectively. The higher overall effective tax rate for the nine months ended April 30, 2005, as compared with the nine months ended April 30, 2004, is principally due to the loss from operations at the Company’s Netherlands subsidiary for which no tax benefit was recorded, as well as the geographic mix of pretax income.

Note 12. Operating Segments

In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”), the Company has determined its reportable business segments based upon an assessment of product types, organizational structure, customers and internally prepared financial statements. The primary factors used by management in analyzing segment performance are net sales and operating income. During fiscal 2004, the Company changed its internal reporting processes to include Product Service with the corresponding product segments to reflect the way the Company, through its executive management, manages, allocates resources and measures the performance of its businesses. Previously, Product Service, which consisted of technical maintenance service on the Company’s products, was reported as a separate operating segment. All prior period segment results have been restated to reflect this change.

The Company’s segments are as follows:

Dialysis, which includes disinfection/sterilization reprocessing equipment, sterilants, supplies, concentrates and electronic equipment related to hemodialysis treatment of patients with acute kidney failure or chronic kidney failure associated with end-stage renal disease.

Endoscopy and Surgical, which includes diagnostic and therapeutic medical equipment such as flexible and rigid endoscopes, surgical equipment and related accessories that are sold to hospitals. Additionally, this segment includes technical maintenance service on its products.

Endoscope Reprocessing, which includes endoscope disinfection equipment, disinfectants and related accessories and supplies that are sold to hospitals, clinics and physicians. Additionally, this segment includes technical maintenance service on its products.

Water Treatment, which includes water treatment equipment design and manufacturing, project management, installation, maintenance, deionization and mixing systems for the medical, pharmaceutical, biotechnology, research, beverage and semiconductor industries.

Filtration and Separation, which includes hollow fiber filter devices and ancillary products for use in cardiosurgery as well as for high-purity fluid and separation applications in the pharmaceutical, electronics, medical, and biotechnology industries. Additionally, this segment includes cold sterilant

products used to disinfect high-purity water systems.

All Other

The All Other segment is comprised of the Scientific operating segment and the Company’s Specialty Packaging operating segment, which was added as a result of the Saf-T-Pak acquisition on June 1, 2004. In accordance with quantitative thresholds established by SFAS 131, the Company combined the Scientific operating segment and the Specialty Packaging operating segment into the All Other segment.

Scientific, which includes microscopes and high performance image analysis hardware and related accessories that are sold to educational institutions, hospitals and government and industrial laboratories, and industrial technology equipment such as borescopes, fiberscopes and video image scopes that are sold primarily to large industrial companies. Additionally, this segment includes technical maintenance service on its products.

Specialty Packaging, which include specialized packaging for the safe transport of infectious and biological specimens, and compliance training services ranging from software and internet sessions to group seminars and private on-site programs.

The operating segments follow the same accounting policies used for the Company’s condensed consolidated financial statements as described in note 2 to the 2004 Form 10-K.

Operating segment information is summarized below:

	Three Months Ended						Nine Months Ended
	April 30,						April 30,
	2005			2004			2005			2004
Net sales:
Dialysis	$	15,773,000		$	15,177,000		$	48,878,000		$	44,816,000
Endoscopy and Surgical	11,661,000			10,111,000			29,577,000			25,727,000
Endoscope Reprocessing	7,635,000			7,903,000			21,712,000			19,304,000
Water Treatment	5,475,000			6,316,000			15,396,000			16,267,000
Filtration and Separation	4,378,000			4,292,000			12,736,000			11,180,000
All Other	5,612,000			3,099,000			17,113,000			7,549,000
Total	$	50,534,000		$	46,898,000		$	145,412,000		$	124,843,000

Operating income:
Dialysis	$	1,474,000		$	1,506,000		$	5,627,000		$	4,910,000
Endoscopy and Surgical	2,899,000			2,406,000			7,153,000			6,039,000
Endoscope Reprocessing	1,202,000			1,400,000			3,562,000			2,378,000
Water Treatment	401,000			111,000			442,000			414,000
Filtration and Separation	1,160,000			1,056,000			3,472,000			2,510,000
All Other	682,000			50,000			1,977,000			64,000
	7,818,000			6,529,000			22,233,000			16,315,000
General corporate expenses	(1,079,000		)	(1,095,000		)	(3,503,000		)	(3,037,000		)
Interest expense, net	(219,000		)	(374,000		)	(883,000		)	(1,205,000		)
Income before income taxes	$	6,520,000		$	5,060,000		$	17,847,000		$	12,073,000

Note 13. Legal Proceedings

In the normal course of business, the Company is subject to pending and threatened legal actions. It is the Company’s policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount of anticipated exposure can be reasonably estimated.

In November 2003, HDC Medical Inc., a Kentucky corporation, filed a complaint against Minntech in the United States District Court, Western District of Kentucky (Case No. 3:03W-694-S). A motion was granted to the Company to transfer the case to the U.S. District Court in Minnesota. The plaintiff alleges that Minntech has violated federal antitrust laws, including the Sherman Act and the Clayton Act. In addition to requesting an injunction enjoining Minntech from continuing in alleged unlawful conduct, the plaintiff seeks an unspecified amount of actual damages, punitive damages, additional and/or treble statutory damages, and costs of suit. The Company believes that the allegations made in the complaint are without merit and it intends to vigorously defend the action. The case is in the discovery phase and is expected to be ready for trial in December 2005.

Note 14. Subsequent Event-Canadian Distribution Agreements

The majority of Carsen’s sales of endoscopy and surgical products and scientific products related to microscopy have been made pursuant to a distribution agreement with Olympus America Inc. (“Olympus”), and the majority of Carsen’s sales of scientific products related to industrial technology equipment have been made pursuant to a distribution agreement with Olympus Industrial America Inc. (collectively the “Olympus Agreements”), under which Carsen has been granted the exclusive right to distribute the covered Olympus products in Canada. Both agreements contractually expire on March 31, 2006.

On June 1, 2005, the Company announced that it had reached an agreement in principle with Olympus in which Carsen was granted a four month extension of its existing Olympus Agreements from the original expiration date of March 31, 2006 and that such agreements would terminate on July 31, 2006. Under the agreement in principle, Olympus will pay Cantel $6,000,000 in cash in consideration for Carsen’s transfer to Olympus of customer lists, sales records and certain other assets related to the sale and servicing of Olympus products and for Carsen’s release of Olympus’s contractual restriction on hiring Carsen personnel. In addition, Carsen will assist Olympus in effecting a smooth transition of Carsen’s business of distributing and servicing Olympus products in Canada. Olympus will also acquire Carsen’s inventory of Olympus products as of July 31, 2006 under the terms of the existing Olympus Agreements. The agreement in principle with Olympus is subject to the negotiation and execution of a definitive written agreement. Carsen’s distribution of Olympus products will remain an important contributor to Cantel’s results of operations through the end of its

fiscal year ending July 31, 2006.

The net sales and operating income attributable to Carsen’s business (inclusive of both Olympus and non-Olympus business, but exclusive of the sale of MediVators reprocessors) constitute the entire Endoscopy and Surgical reporting segment and Scientific operating segment, which is included within the All Other reporting segment.

Operating segment information attributable to Carsen’s business is summarized below:

	Three Months Ended				Nine Months Ended
	April 30,				April 30,
	2005		2004		2005		2004
Net sales:
Endoscopy and Surgical	$	11,661,000	$	10,111,000	$	29,577,000	$	25,727,000
Endoscope Reprocessing	930,000		854,000		2,345,000		1,821,000
Scientific (included in All Other)	4,005,000		3,099,000		13,221,000		7,549,000
Total	$	16,596,000	$	14,064,000	$	45,143,000	$	35,097,000

Operating income:
Endoscopy and Surgical	$	2,899,000	$	2,406,000	$	7,153,000	$	6,039,000
Endoscope Reprocessing	157,000		196,000		536,000		397,000
Scientific (included in All Other)	155,000		50,000		1,091,000		64,000
	$	3,211,000	$	2,652,000	$	8,780,000	$	6,500,000

Total net sales of Carsen (including both its Olympus and non-Olympus product lines) were approximately 33% and 31% of Cantel’s consolidated net sales for the three and nine months ended April 30, 2005, respectively. Approximately 80% of Carsen’s net sales for the three and nine months ended April 30, 2005 were attributable to its Olympus distribution and service businesses.

Operating income of Carsen (including both its Olympus and non-Olympus product lines) was approximately 41% and 40% of Cantel’s consolidated operating income before general corporate expenses and interest expense for the three and nine months ended April 30, 2005, respectively.

Cantel is currently evaluating Carsen’s remaining non-Olympus product lines, most of which are aligned with Olympus products, to determine their viability without Carsen’s Olympus business. There can be no assurance that any of such product lines, with the exception of the MediVators reprocessors, will be continued after July 31, 2006, or if continued will be profitable or commercially viable.

In May 2005, the Company reviewed Carsen’s assets for potential impairment and concluded that none of Carsen’s assets were impaired since the individual fair values exceeded their carrying values. However, upon the execution of a definitive written agreement with

The following table gives information as to the net sales and the percentage to the total net sales of each reporting segment of the Company:

	Three Months Ended						Nine Months Ended
	April 30,						April 30,
	2005			2004			2005			2004
	(Dollar amounts in thousands)
	$		%	$		%	$		%	$		%
Dialysis	$	15,773	31.2	$	15,177	32.4	$	48,878	33.6	$	44,816	35.9
Endoscopy and Surgical	11,661		23.1	10,111		21.6	29,577		20.3	25,727		20.6
Endoscope Reprocessing	7,635		15.1	7,903		16.8	21,712		14.9	19,304		15.5
Water Treatment	5,475		10.8	6,316		13.5	15,396		10.6	16,267		13.0
Filtration and Separation	4,378		8.7	4,292		9.1	12,736		8.8	11,180		9.0
All Other	5,612		11.1	3,099		6.6	17,113		11.8	7,549		6.0
	$	50,534	100.0	$	46,898	100.0	$	145,412	100.0	$	124,843	100.0

During fiscal 2004, the Company changed its internal reporting processes to include Product Service within the corresponding product segments to reflect the way the Company, through its executive management, manages, allocates resources and measures the performance of its businesses. Previously, Product Service, which consisted of technical maintenance service on the Company’s products, was reported as a separate operating segment. All prior period segment results have been restated to reflect this change.

The All Other segment is comprised of the Scientific operating segment and the Company’s new operating segment, Specialty Packaging, which was added as a result of the Saf-T-Pak acquisition on June 1, 2004.

Net Sales

Net sales increased by $3,636,000, or 7.8%, to $50,534,000 for the three months ended April 30, 2005, from $46,898,000 for the three months ended April 30, 2004. Net sales contributed by Saf-T-Pak for the three months ended April 30, 2005 were $1,607,000. Net sales of the Company’s pre-existing business increased by $2,029,000, or 4.3%, to $48,927,000 for the three months ended April 30, 2005, compared with the three months ended April 30, 2004.

Net sales increased by $20,569,000, or 16.5%, to $145,412,000 for the nine months ended April 30, 2005, from $124,843,000 for the nine months ended April 30, 2004. Net sales contributed by Saf-T-Pak for the nine months ended April 30, 2005 were $3,892,000. Net sales of the Company’s pre-existing business increased by $16,677,000, or 13.4%, to $141,520,000 for the nine months ended April 30, 2005, compared with the nine months ended April 30, 2004.

Net sales were positively impacted for the three and nine months ended April 30, 2005, compared with the three and nine months ended April 30, 2004, by approximately $1,464,000 and $3,689,000, respectively, due to the translation of Carsen’s and Biolab’s net sales using a stronger Canadian dollar against the United States dollar. Carsen’s net sales are principally included in the Endoscopy and Surgical and Scientific segments. Biolab’s net sales

are included in the Water Treatment segment.

In addition, net sales were positively impacted for the three and nine months ended April 30, 2005, compared with the three and nine months ended April 30, 2004, by approximately $167,000 and $685,000, respectively, due to the translation of Minntech’s Netherlands subsidiary net sales using a stronger euro against the United States dollar. The majority of the net sales of Minntech’s Netherlands subsidiary are included in the Dialysis segment.

Increases in selling prices of the Company’s products did not have a significant effect on net sales for the three and nine months ended April 30, 2005.

The increase in net sales of the Company’s pre-existing business for the three and nine months ended April 30, 2005 was principally attributable to increases in sales of endoscopy and surgical products and services, scientific products and dialysis products and, with respect to the nine months ended April 30, 2005, the increase in net sales was also attributable to an increase in endoscope reprocessing products and services and filtration and separation products. These increases in net sales were partially offset by a decrease in sales of water treatment products for the three and nine months ended April 30, 2005.

The increase in sales of endoscopy and surgical products and services was primarily due to improved healthcare funding in Canada, the translation of Carsen’s net sales using a stronger Canadian dollar against the United States dollar, enhanced offerings of surgical products and the effect of reorganizing the sales force. Net sales of endoscopy and surgical products and services increased by 15.3% and 15.0% in U.S. dollars, and increased by 6.9% and 6.7% in their functional Canadian currency, during the three and nine months ended April 30, 2005, respectively, compared with the three and nine months ended April 30, 2004. Healthcare funding in Canada is dependent upon governmental appropriations. During the past year, Canada adopted a budget that provides for a significant increase in funding for healthcare. However, the Company cannot ascertain what impact the funding situation or Canada’s budget will have on future sales of endoscopy and surgical products.

Sales in the All Other reporting segment increased 81.1% and 126.7% for the three and nine months ended April 30, 2005, respectively, as compared with the three and nine months ended April 30, 2004. Net sales contributed by the Specialty Packaging operating segment for the three and nine months ended April 30, 2005 were $1,607,000 and $3,892,000, respectively. Net sales contributed by the Scientific operating segment were $4,005,000 and $13,221,000, an increase of $906,000 and $5,672,000, or 29.2% and 75.1%, for the three and nine months ended April 30, 2005, respectively, compared with the three and nine months ended April 30, 2004. The increase in sales of scientific products for the three and nine months ended April 30, 2005 was primarily due to the introduction of a new confocal microscope, increased demand in Canada for scientific and industrial microscopes and related imaging products, and improved government funding for research in Canada. The increase in sales for the nine months ended April 30, 2005 was also due to a large sale of

microscopes and related imaging products to a Canadian university during the three months ended October 31, 2004.

Sales of dialysis products and services increased by 3.9% and 9.1% for the three and nine months ended April 30, 2005, respectively, compared with the three and nine months ended April 30, 2004, primarily due to an increase in customer demand for concentrate (a concentrated acid used to prepare dialysate, a chemical solution that draws waste products from a patient’s blood through a dialyzer membrane during hemodialysis treatment) by an international customer and an increase in demand for dialyzer reuse supplies. Partially offsetting the increase in sales were lower average selling prices for the Company’s Renalin (sterilant) product due to increased sales to large national chains that typically receive lower prices.

The dialysis industry has been undergoing significant consolidation through the acquisition by certain major dialysis chains of smaller chains and independents. In December 2004, DaVita Inc.(“DaVita”), the second-largest dialysis chain in the United States, announced that it entered into a definitive agreement to acquire the U.S. renal care business of Gambro Healthcare, Inc.(“Gambro”). In addition, in May 2005, Fresenius Medical Care AG (“Fresenius”), the largest dialysis chain in the United States and a provider of single-use dialyzer products, announced that it entered into an agreement to acquire Renal Care Group, Inc.(“RCG”). DaVita, Gambro, and RCG are significant customers of the Company’s dialysis reuse products. If Fresenius’s acquisition is consummated, and if Fresenius converts all or substantially all of the dialysis clinics of RCG into single-use facilities, the Company’s sales of dialysis products could be adversely affected. In addition, the consolidation of dialysis providers could result in greater buying power by the larger resulting entities and thereby a reduction in the Company’s net sales due to reduced average selling prices of dialysis products. However, given the uncertainty of the post-acquisition operating strategies with respect to these two transactions, the Company is currently unable to determine the impact on its future sales of dialysis products and services.

The increase in sales of endoscope reprocessing products and services of 12.5% for the nine months ended April 30, 2005, compared with the nine months ended April 30, 2004, was primarily due to an increase in sales of disinfectants (including the Company’s new Adaspor product in Europe) and related consumables and product service, both in the United States and internationally. The increase in sales of these products can be attributed to the increased field population of equipment and the Company’s ability to convert users of competitive disinfectants to its products. For the three months ended April 30, 2005, compared to the three months ended April 30, 2004, sales of endoscope reprocessing products and services decreased by 3.4% due to a decrease in demand for endoscope disinfection equipment in the United States and the delayed offering in certain parts of Europe of the Dyped endoscope disinfection equipment which is designed to meet European standards and market requirements.

The increase in sales of filtration and separation products of 13.9% for the nine months ended April 30, 2005, compared with the

nine months ended April 30, 2004, was primarily due to an increase in customer demand for the Company’s pediatric filters and water filtration products in the United States, domestic and international demand for the Company’s hemofilters (a device used for slow, continuous blood filtration therapy used to control fluid overload and acute renal failure in unstable, critically ill patients that cannot tolerate the rapid filtration rates of conventional hemodialysis), and international sales of the Company’s new Minncare dry fog disinfection system.

The decrease in sales of water treatment products and services of 13.3% and 5.4% for the three and nine months ended April 30, 2005, respectively, compared with the three and nine months ended April 30, 2004, was primarily due to the recognition of certain large low margin capital equipment sales during the three months ended April 30, 2004, which purchase orders had been accepted prior to the acquisition of Biolab.

Gross profit

Gross profit increased by $2,271,000, or 13.2%, to $19,523,000 for the three months ended April 30, 2005, from $17,252,000 for the three months ended April 30, 2004. Gross profit of the Company’s pre-existing business increased by $1,261,000, or 7.3%, to $18,513,000 for the three months ended April 30, 2005, compared with the three months ended April 30, 2004. Gross profit contributed by Saf-T-Pak for the three months ended April 30, 2005 was $1,010,000.

Gross profit increased by $10,015,000, or 22.0%, to $55,559,000 for the nine months ended April 30, 2005, from $45,544,000 for the nine months ended April 30, 2004. Gross profit of the Company’s pre-existing business increased by $7,706,000, or 16.9%, to $53,250,000 for the nine months ended April 30, 2005, compared with the nine months ended April 31, 2004. Gross profit contributed by Saf-T-Pak for the nine months ended April 30, 2005 was $2,309,000.

Gross profit as a percentage of net sales for the three months ended April 30, 2005 and 2004 was 38.6% and 36.8%, respectively. Gross profit as a percentage of net sales of the Company’s pre-existing business for the three months ended April 30, 2005 was 37.8%. Gross profit as a percentage of net sales for Saf-T-Pak for the three months ended April 30, 2005 was 62.9%.

Gross profit as a percentage of net sales for the nine months ended April 30, 2005 and 2004 was 38.2% and 36.5%, respectively. Gross profit as a percentage of net sales of the Company’s pre-existing business for the nine months ended April 30, 2005 was 37.6%. Gross profit as a percentage of net sales for Saf-T-Pak for the nine months ended April 30, 2005 was 59.3%.

The higher gross profit percentage from the Company’s pre-existing business for the three and nine months ended April 30, 2005, compared with the three and nine months ended April 30, 2004, was primarily attributable to favorable sales mix in the Company’s endoscope reprocessing and filtration and separation operating segments and favorable Canadian dollar exchange rates, which principally impact the endoscopy and surgical, water treatment and

scientific operating segments. Partially offsetting these increases in gross profit percentage was a lower gross profit percentage on the Company’s dialysis products due to sales mix.

The favorable Canadian dollar exchange rates lowered Carsen’s and Biolab’s cost of inventory purchased from suppliers in the United States, and therefore decreased cost of sales and increased gross profit, by approximately $528,000 and $1,707,000 for the three and nine months ended April 30, 2005, respectively, compared with the three and nine months ended April 30, 2004. In addition, gross profit was positively impacted for the three and nine months ended April 30, 2005, compared with the three and nine months ended April 30, 2004, by approximately $526,000 and $1,315,000, respectively, due to the translation of Carsen’s and Biolab’s gross profit using a stronger Canadian dollar against the United States dollar (which also impacts net sales and therefore has no impact on gross profit as a percentage of net sales). Similarly, gross profit was positively impacted for the three and nine months ended April 30, 2005, compared with the three and nine months ended April 30, 2004, by approximately $4,000 and $111,000, respectively, due to the translation of Minntech’s Netherlands subsidiary gross profit using a stronger euro against the United States dollar.

Operating Expenses

Selling expenses increased by $691,000 to $6,007,000 for the three months ended April 30, 2005, from $5,316,000 for the three months ended April 30, 2004. For the nine months ended April 30, 2005, selling expenses increased by $2,212,000 to $17,229,000, from $15,017,000 for the nine months ended April 30, 2004. For the three and nine months ended April 30, 2005, selling expenses increased principally due to the inclusion of Saf-T-Pak; increases in commissions and incentive compensation due to improved operating results; the translation of Carsen’s and Biolab’s expenses using a stronger Canadian dollar against the United States dollar; and the addition of sales representatives and management personnel primarily in the Endoscopy and Surgical segment.

Selling expenses as a percentage of net sales were 11.9% and 11.8% for the three and nine months ended April 30, 2005, respectively, compared with 11.3% and 12.0% for the three and nine months ended April 30, 2004.

General and administrative expenses increased by $272,000 to $5,674,000 for the three months ended April 30, 2005, from $5,402,000 for the three months ended April 30, 2004. For the nine months ended April 30, 2005, general and administrative expenses increased by $2,515,000 to $16,491,000, from $13,976,000 for the nine months ended April 30, 2004. For the three and nine months ended April 30, 2005, general and administrative expenses increased principally due to increased accounting and consulting costs relating to corporate governance; the inclusion of Saf-T-Pak; additional executive personnel; increases in foreign exchange losses associated with translating certain foreign denominated assets into functional currencies; the translation of Carsen’s and Biolab’s expenses using a stronger Canadian dollar against the United States dollar; an increase in incentive compensation; and increases in the cost of

commercial insurance. Partially offsetting these increases was a $550,000 charge for the estimated settlement of legal claims recorded during the three months ended April 30, 2004.

General and administrative expenses as a percentage of net sales were 11.2% and 11.3% for the three and nine months ended April 30, 2005, respectively, compared with 11.5% and 11.2% for the three and nine months ended April 30, 2004.

Research and development expenses (which include continuing engineering costs) increased by $3,000 to $1,103,000 for the three months ended April 30, 2005, from $1,100,000 for the three months ended April 30, 2004. For the nine months ended April 30, 2005, research and development expenses decreased by $164,000 to $3,109,000, from $3,273,000 for the nine months ended April 30, 2004. The majority of research and development expenses for the three and nine months ended April 30, 2005 and 2004 related to the Dyped endoscope reprocessor and specialty filtration products.

Interest

Interest expense decreased by $104,000 to $353,000 for the three months ended April 30, 2005, from $457,000 for the three months ended April 30, 2004. For the nine months ended April 30, 2005, interest expense decreased by $180,000 to $1,202,000, from $1,382,000 for the nine months ended April 30, 2004. For the three and nine months ended April 30, 2005, interest expense decreased primarily due to the decrease in average outstanding borrowings, partially offset by an increase in average interest rates. Interest income increased by $71,000 to $134,000 for the three months ended April 30, 2005, from $63,000 for the three months ended April 30, 2004. For the nine months ended April 30, 2005, interest income increased by $191,000 to $319,000, from $128,000 for the nine months ended April 30, 2004. For the three and nine months ended April 30, 2005, interest income increased primarily due to an increase in cash available for short-term investments.

Income before income taxes

Income before income taxes increased by $1,460,000 to $6,520,000 for the three months ended April 30, 2005, from $5,060,000 for the three months ended April 30, 2004. For the nine months ended April 30, 2005, income before income taxes increased by $5,774,000 to $17,847,000, from $12,073,000 for the nine months ended April 30, 2004.

Income taxes

The Company’s results of operations for the three and nine months ended April 30, 2005 and 2004 also reflect income tax expense for its international subsidiaries at their respective statutory rates. Such international subsidiaries include the Company’s subsidiaries in Canada and Japan, which had effective tax rates during the nine months ended April 30, 2005 of approximately 35.3% and 45.0%, respectively. The higher overall effective tax rate for the nine months ended April 30, 2005, as compared with the nine months ended April 30, 2004, is principally due to the loss from operations at the Company’s Netherlands subsidiary for which no tax benefit was recorded, as well as the geographic mix of pretax income.

Liquidity and Capital Resources

Working capital

At April 30, 2005, the Company’s working capital was $55,607,000, compared with $46,735,000 at July 31, 2004. This increase in working capital was primarily due to the increase in cash, as described below, as well as the translation of net assets of the Company’s Canadian subsidiaries using a stronger Canadian dollar against the United States dollar.

Cash flows from operating activities

Net cash provided by operating activities was $14,821,000 and $11,200,000 for the nine months ended April 30, 2005 and 2004, respectively. For the nine months ended April 30, 2005, the net cash provided by operating activities was primarily due to net income, after adjusting for depreciation and amortization, and deferred income taxes, partially offset by an increase in accounts receivable due to an increase in sales and a decrease in income taxes payable due to the timing associated with payments. For the nine months ended April 30, 2004, the net cash provided by operating activities was primarily due to net income, after adjusting for depreciation and amortization, deferred income taxes, and an increase in income taxes payable primarily due to the receipt of a tax refund, partially offset by increases in inventories due to purchases made by Carsen prior to supplier price increases and prepaid expenses and other current assets due to the timing of insurance payments.

Cash flows from investing activities

Net cash used in investing activities was $2,898,000 and $18,143,000 for the nine months ended April 30, 2005 and 2004, respectively. For the nine months ended April 30, 2005, the net cash used in investing activities was primarily for capital expenditures. For the nine months ended April 30, 2004, the net cash used in investing activities was primarily for the acquisitions of Biolab, Mar Cor and Dyped and capital expenditures.

Cash flows from financing activities

Net cash used in financing activities was $5,982,000 for the nine months ended April 30, 2005, compared with net cash provided by financing activities of $3,790,000 for the nine months ended April 30, 2004. For the nine months ended April 30, 2005, the net cash

used in financing activities was primarily attributable to repayments under the Company’s credit facilities, partially offset by exercises of stock options. For the nine months ended April 30, 2004, the net cash provided by financing activities was primarily attributable to borrowings under the Company’s credit facilities related to the acquisition of Mar Cor and proceeds from the exercises of stock options, partially offset by repayments under the credit facilities.

Credit facilities

On February 17, 2005, the Company amended its U.S. Credit Facilities as follows: (i) the margins applicable to the Company’s outstanding borrowings were decreased to zero to 0.50% above the lenders’ base rate and 1.00% to 1.75% above the London Interbank Offered Rate (“LIBOR”), depending upon the Company’s consolidated ratio of debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”), (ii) the maximum allowed consideration paid for an acquisition was increased from $5,000,0000 to $25,000,000, (iii) a feature was added that gives the Company the ability to increase the U.S. Revolving Credit Facility from $17,500,000 up to $40,000,000 at any time on or before the U.S Revolving Credit Facility’s termination date upon mutual agreement from the lenders and the Company, (iv) certain financial covenants were modified to allow for the potential increased borrowings and capital expenditures, (v) fees on the unused portion of the U.S. Revolving Credit Facility were decreased to rates ranging from .20% to .35%, depending upon the Company’s consolidated ratio of debt to EBITDA, and (vi) the requirement that determined the available borrowings under the U.S. Revolving Credit Facility, which was based upon percentages of the eligible accounts receivable and inventories of Cantel, Minntech and Mar Cor, was eliminated. Therefore, the margins applicable to the Company’s outstanding borrowings decreased on February 17, 2005 from .75% above the lenders’ base rate and 2.00% above LIBOR to the lenders’ base rate and 1.00% above LIBOR.

On May 31, 2005, the margins applicable to the Company’s outstanding borrowings were the lenders’ base rate and 1.00% above LIBOR. The base rates associated with the U.S. lenders and the Canadian lender were 6.00% and 4.25%, respectively, at May 31, 2005, and the LIBOR rates ranged from 2.27% to 2.96% at May 31, 2005. At May 31, 2005, all of the Company’s outstanding borrowings were under LIBOR contracts.

At April 30, 2005, aggregate annual required maturities of the Term Loan Facility are as follows:

Three month period ending July 31, 2005	$	750,000
Fiscal 2006	5,000,000
Fiscal 2007	6,000,000
Fiscal 2008	4,750,000
Total	$	16,500,000

Dyped note payable and other long-term liabilities

In conjunction with the Dyped acquisition on September 12, 2003, the Company issued a note with a face value of €1,350,000 ($1,505,000 using the exchange rate on the date of the acquisition). At April 30, 2005, approximately $1,587,000 of this note was outstanding using the exchange rate on April 30, 2005. Such note is non-interest bearing and has been recorded at its present value of $1,401,000 at April 30, 2005. The current portion of this note is recorded in accrued expenses and the remainder is recorded in other long-term liabilities.

Also included in other long-term liabilities are deferred compensation arrangements for certain former Minntech directors and officers.

Operating leases

Aggregate future minimum commitments at April 30, 2005 under noncancelable operating leases for property and equipment are as follows:

Three month period ending July 31, 2005	$	532,000
Fiscal 2006	1,758,000
Fiscal 2007	1,205,000
Fiscal 2008	883,000
Fiscal 2009	619,000
Thereafter	2,249,000
Total lease commitments	$	7,246,000

The increase in the Company’s future minimum commitments under noncancelable operating leases during the three months ended April 30, 2005 was principally attributable to two new manufacturing facilities in Burlington, Ontario and Jackson, Mississippi to be used in connection with the Company’s water treatment and dialysis businesses, respectively.

Olympus-Carsen distribution agreements

The majority of Carsen’s sales of endoscopy and surgical products and scientific products related to microscopy have been made pursuant to a distribution agreement (the “Olympus Agreement”) with Olympus America Inc. (“Olympus”), and the majority of Carsen’s sales of scientific products related to industrial technology equipment have been made pursuant to a distribution agreement (the “Olympus Industrial Agreement”) with Olympus Industrial America Inc.(collectively the “Olympus Agreements”), under which Carsen has been granted the exclusive right to distribute the covered Olympus products in Canada. Under the Olympus Agreement, Carsen is subject to a minimum purchase requirement of $23,500,000 for the contract year ending March 31, 2006. There are no minimum purchase requirements under the Olympus Industrial Agreement. Both agreements contractually expire on March 31, 2006.

agreement in principle with Olympus is subject to the negotiation and execution of a definitive written agreement. Carsen’s distribution of Olympus products will remain an important contributor to Cantel’s results of operations through the end of its fiscal year ending July 31, 2006.

Operating segment information attributable to Carsen’s business is summarized below:

	Three Months Ended				Nine Months Ended
	April 30,				April 30,
	2005		2004		2005		2004
Net sales:
Endoscopy and Surgical	$	11,661,000	$	10,111,000	$	29,577,000	$	25,727,000
Endoscope Reprocessing	930,000		854,000		2,345,000		1,821,000
Scientific (included in All Other)	4,005,000		3,099,000		13,221,000		7,549,000
Total	$	16,596,000	$	14,064,000	$	45,143,000	$	35,097,000

Operating income:
Endoscopy and Surgical	$	2,899,000	$	2,406,000	$	7,153,000	$	6,039,000
Endoscope Reprocessing	157,000		196,000		536,000		397,000
Scientific (included in All Other)	155,000		50,000		1,091,000		64,000
	$	3,211,000	$	2,652,000	$	8,780,000	$	6,500,000

However, upon the execution of a definitive written agreement with Olympus and Cantel’s ultimate determination of the viability of Carsen’s non-Olympus business subsequent to the expiration of the Olympus Agreements, the Company intends to conduct another impairment review of Carsen’s assets. Additionally, the Company expects it will incur certain costs associated with the termination of the Olympus Agreements, including severance costs, continuing lease obligations and other wind-down costs; however at this time it is not possible to estimate the amount of such costs. In any event, the Company does not expect costs associated with the termination of the Olympus Agreements to exceed the $6,000,000 in cash consideration that will be paid by Olympus.

Minntech-Olympus distribution agreement

Effective August 1, 2003, Minntech renewed its distribution agreement with Olympus (the “MediVators Agreement”) which grants Olympus the exclusive right to distribute the majority of the Company’s endoscope reprocessing products and related accessories and supplies in the United States and Puerto Rico. Failure by Olympus to achieve the minimum purchase projections in any contract year gives Minntech the option to terminate the MediVators Agreement. The MediVators Agreement expires on August 1, 2006. Despite the fact that Olympus historically has not achieved the minimum purchase projections, the Company has historically elected not to terminate or significantly restructure the MediVators Agreement because the Company believed that Olympus’ domestic distribution capabilities provided the Company with the broadest distribution and profit potential for its endoscope reprocessing products. The Company will evaluate whether it will extend the agreement, seek a new third party distributor, or directly undertake the distribution function after August 1, 2006.

Financing needs

The Company has determined that it will repatriate minimal amounts of existing and future accumulated profits from its international locations until existing domestic NOLs are exhausted, which the Company estimates to be no earlier than the end of fiscal 2005. Notwithstanding this strategy, the Company believes that its current cash position, anticipated cash flows from operations, and the funds available under its revolving credit facilities will be sufficient to satisfy the Company’s cash operating requirements for the foreseeable future based upon its existing operations. At May 31, 2005, approximately $23,500,000 was available under the revolving credit facilities, of which $17,500,000 was available for its United States operations.

Foreign currency

During the three and nine months ended April 30, 2005, compared with the three and nine months ended April 30, 2004, the average value of the Canadian dollar increased by approximately 8.1% and 7.6%, respectively, relative to the value of the United States dollar. Changes in the value of the Canadian dollar against the United States dollar affect the Company’s results of operations principally for the following reasons: (i) Carsen purchases substantially all of its products in United States dollars and sells

its products in Canadian dollars, (ii) Biolab and Saf-T-Pak purchase a portion of their inventories in United States dollars and sell a significant amount of their products in United States dollars and therefore are exposed to foreign currency gains and losses upon payment of such payables and the collection of such receivables, and (iii) the results of operations of the Company’s Canadian subsidiaries are translated from their functional Canadian currency to United States dollars. During the three and nine months ended April 30, 2005, compared with the three and nine months ended April 30, 2004, such strengthening of the Canadian dollar relative to the United States dollar had an overall positive impact upon the Company’s results of operations.

Under the Canadian Revolving Credit Facility, Carsen has a $35,000,000 (United States dollars) foreign currency hedging facility, as amended, which is available to hedge against the impact of such currency fluctuations on purchases of inventories. Total commitments for foreign currency forward contracts under this facility amounted to $15,297,000 (United States dollars) at May 31, 2005 and cover a portion of the Canadian subsidiary’s projected purchases of inventories through July 2006. These foreign currency forward contracts have been designated as cash flow hedge instruments. The weighted average exchange rate of the forward contracts open at May 31, 2005 was $1.2638 Canadian dollar per United States dollar, or $.7913 United States dollar per Canadian dollar. The exchange rate published by the Wall Street Journal on May 31, 2005 was $1.2552 Canadian dollar per United States dollar, or $.7967 United States dollar per Canadian dollar.

During the three and nine months ended April 30, 2005, compared with the three and nine months ended April 30, 2004, the value of the euro increased by approximately 6.0% and 7.5%, respectively, relative to the value of the United States dollar. Changes in the value of the euro against the United States dollar affect the Company’s results of operations principally for the following reasons: (i) a portion of the net assets of Minntech’s Netherlands subsidiary are denominated and ultimately settled in United States dollars but must be converted into its functional euro currency, and (ii) the results of operations of Minntech’s Netherlands subsidiary are translated from its functional euro currency to United States dollars. During the three and nine months ended April 30, 2005, such strengthening of the euro relative to the United States dollar had an overall adverse impact upon the Company’s results of operations.

In order to hedge against the impact of fluctuations in the value of the euro relative to the United States dollar, the Company enters into short-term contracts to purchase euros forward, which contracts are generally one month in duration. These short-term contracts have been designated as fair value hedges. There was one foreign currency forward contract amounting to €2,669,000 at May 31, 2005 which covers certain assets and liabilities of Minntech’s Netherlands subsidiary which are denominated in United States dollars. Such contract expires on June 30, 2005. Under its U.S. Credit Facilities, such contracts to purchase euros may not exceed $12,000,000 in an aggregate notional amount at any time. During the three and nine months ended April 30, 2005, such forward contracts were effective in offsetting the adverse impact of the strengthening

of the euro on the Company’s results of operations.

All of the Company’s foreign currency forward contracts are designated as hedges in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, as amended, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). Recognition of gains and losses related to the Canadian hedges is deferred within other comprehensive income until settlement of the underlying commitments, and realized gains and losses are recorded within cost of sales upon settlement. Gains and losses related to the hedging contracts to buy euros forward are immediately realized within general and administrative expenses due to the short-term nature of such contracts.

For purposes of translating the balance sheet, at April 30, 2005 compared with July 31, 2004, the value of the Canadian dollar and the value of the euro increased by approximately 5.6% and 7.6%, respectively, compared to the value of the United States dollar. The total of these currency movements resulted in a foreign currency translation gain of $2,069,000 for the nine months ended April 30, 2005, thereby increasing stockholders’ equity.

Changes in the value of the Japanese yen relative to the United States dollar during the three and nine months ended April 30, 2005 and 2004 did not have a significant impact upon either the Company’s results of operations or the translation of the balance sheet, primarily due to the fact that the Company’s Japanese subsidiary accounts for a relatively small portion of consolidated net sales, net income and net assets.

Inflation

Inflation has not significantly impacted the Company’s operations.

Critical Accounting Policies

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company continually evaluates its estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its condensed consolidated financial statements.

Revenue Recognition

Revenue on product sales (excluding certain sales of endoscope reprocessing equipment in the United States) is recognized as products are shipped to customers and title passes. The passing of title is determined based upon the FOB terms specified for each shipment. With respect to dialysis, filtration and separation, packaging and a portion of endoscope reprocessing products, shipment terms are generally FOB origin for common carrier and FOB destination when the Company’s distribution fleet is utilized. With respect to endoscopy and surgical, water treatment and scientific products, shipment terms may be either FOB origin or destination. Customer acceptance for the majority of the Company’s product sales occurs at the time of delivery. In certain instances, primarily with respect to some of the Company’s water treatment products and an insignificant amount of the Company’s sales of dialysis equipment and scientific products, post-delivery obligations such as installation, in-servicing or training are contractually specified; in such instances, revenue recognition is deferred until all of such conditions have been substantially fulfilled such that the products are deemed functional by the end-user. With respect to a portion of endoscopy and surgical, water treatment and scientific product sales, equipment is sold as part of a system for which the equipment is functionally interdependent or the customer’s purchase order specifies “ship-complete” as a condition of delivery; revenue recognition on such sales is deferred until all equipment has been delivered.

With respect to a portion of endoscopy and surgical sales, the Company enters into arrangements whereby revenue is immediately recognized upon the transfer of equipment to customers who pay on a cost per procedure basis, subject to minimum monthly payments. Such arrangements are non-cancelable by the customer and provide for a bargain purchase option by the customer at the conclusion of the term. All direct costs related to these transactions are recorded at the time of revenue recognition. Some of such transactions also provide for future servicing of the equipment, which service revenue component is deferred and recognized over the period that such services are provided. With respect to these multiple element arrangements, revenue is allocated to the equipment and service components based upon vendor specific objective evidence which principally includes comparable historical transactions of similar equipment and service sold as stand-alone components.

Sales of a majority of the Company’s endoscope reprocessing equipment to a third party distributor in the United States are recognized on a bill and hold basis. Such sales satisfy each of the following criteria: (i) the risks of ownership have passed to the third party distributor; (ii) the third party distributor must provide a written purchase order committing to the purchase of specified units; (iii) the bill and hold arrangement was specifically requested by the third party distributor for the purpose of minimizing the impact of multiple shipments of the units; (iv) the third party distributor provides specific instructions for shipment to customers, and completed units held by the Company for the third party distributor generally do not exceed three months of anticipated shipments; (v) the Company has no further performance

obligations with respect to such units; (vi) completed units are invoiced to the third party distributor with 30 day payment terms and such receivables are generally satisfied within such terms; and (vii) completed units are ready for shipment and segregated in a designated section of the Company’s warehouse reserved only for the third party distributor.

Revenue on service sales is recognized when repairs are completed at the customer’s location or when repairs are completed at the Company’s facilities and the products are shipped to customers. All shipping and handling fees invoiced to customers, such as freight, are recorded as revenue (and related costs are included within cost of sales) at the time the sale is recognized.

None of the Company’s sales, including the bill and hold sales arrangement, contain right-of-return provisions, and customer claims for credit or return due to damage, defect, shortage or other reason must be pre-approved by the Company before credit is issued or such product is accepted for return. No cash discounts for early payment are offered except with respect to a small portion of the Company’s sales of dialysis products and certain prepaid packaging products. Price protection is not offered by the Company, although advance pricing contracts or required notice periods prior to implementation of price increases exist for certain customers with respect to many of the Company’s products. With respect to certain of the Company’s dialysis and endoscope reprocessing customers, volume rebates and trade-in allowances are provided; such volume rebates and trade-in allowances are provided for as a reduction of sales at the time of revenue recognition and amounted to $126,000 and $583,000 for the three and nine months ended April 30, 2005, respectively, and $258,000 and $544,000 for the three and nine months ended April 30, 2004, respectively. Such allowances are determined based on estimated projections of sales volume and trade-ins for the entire rebate agreement periods. Trade-in allowances were not significant during the three and nine months ended April 30, 2005. If it becomes known that sales volume to customers will deviate from original projections, the volume rebate provisions originally established would be adjusted accordingly.

The majority of the Company’s dialysis products and services are sold to end-users; the majority of filtration and separation products and endoscope reprocessing products and services are sold to third party distributors; the majority of endoscopy and surgical products and services are sold directly to hospitals; the majority of water treatment products and services are sold to hospitals, dialysis clinics, pharmaceutical and biotechnology companies and other end-users; scientific products and services are sold to hospitals, laboratories and other end-users; and packaging products are sold to third-party distributors, medical research companies, laboratories, pharmaceutical companies, hospitals, government agencies and other end-users. Sales to all of these customers follow the Company’s revenue recognition policies.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consist of amounts due to the Company from normal business activities. Allowances for doubtful accounts are

reserves for the estimated loss from the inability of customers to make required payments. The Company uses historical experience as well as current market information in determining the estimate. While actual losses have historically been within management’s expectations and provisions established, if the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventories

Inventories consist of products which are sold in the ordinary course of the Company’s business and are stated at the lower of cost (first-in, first-out) or market. In assessing the value of inventories, the Company must make estimates and judgments regarding reserves required for product obsolescence, aging of inventories and other issues potentially affecting the saleable condition of products. In performing such evaluations, the Company uses historical experience as well as current market information. In one such evaluation in fiscal 2003, the Company determined that certain parts relating to the Company’s endoscope reprocessing equipment were obsolete, primarily due to design changes, resulting in an additional provision of approximately $300,000. With few exceptions, the saleable value of the Company’s inventories has historically been within management’s expectation and provisions established, however, rapid changes in the market due to competition, technology and various other factors could have an adverse effect on the saleable value of the Company’s inventories, resulting in the need for additional reserves.

Goodwill and Intangible Assets

Certain of the Company’s identifiable intangible assets, including technology, customer relationships, patents and non-compete agreements, are amortized on the straight-line method over their estimated useful lives which range from 3 to 20 years. Additionally, the Company has recorded goodwill and trademarks and tradenames, all of which have indefinite useful lives and are therefore not amortized. All of the Company’s intangible assets and goodwill are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and goodwill and intangible assets with indefinite lives are reviewed for impairment at least annually. The Company’s management is primarily responsible for determining if impairment exists and considers a number of factors, including third-party valuations, when making these determinations. In performing a review for goodwill impairment, management uses a two-step process that begins with an estimation of the fair value of the related operating segments. The first step is a review for potential impairment, and the second step measures the amount of impairment, if any. In performing its annual review for indefinite lived intangibles, management compares the current fair value of such assets to their carrying values. With respect to amortizable intangible assets when impairment indicators are present, management would determine whether non-discounted cash flows would be sufficient to recover the carrying value of the assets; if not, the carrying value of the assets would be adjusted to their fair value.

On July 31, 2004, management concluded that none of the Company’s intangible assets or goodwill was impaired since the individual fair values exceeded their carrying values. While the results of these annual reviews have historically not indicated impairment, impairment reviews are highly dependent on management’s projections of future operating results of the Company which management believes to be reasonable.

Long-lived assets

The Company evaluates the carrying value of long-lived assets including property, equipment and other assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An assessment is made to determine if the sum of the expected future non-discounted cash flows from the use of the assets and eventual disposition is less than the carrying value. If the sum of the expected non-discounted cash flows is less than the carrying value, an impairment loss is recognized based on fair value. Historically, the Company’s assessment of its long-lived assets have not differed significantly from the actual amounts realized. However, the determination of fair value requires the Company to make certain assumptions and estimates and is highly subjective, and accordingly, actual amounts realized may differ significantly from the Company’s estimate.

Warranties

The Company provides for estimated costs that may be incurred to remedy deficiencies of quality or performance of the Company’s products at the time of revenue recognition. Most of the Company’s products have a one year warranty, although a majority of the Company’s endoscope reprocessing equipment in the United States may carry a warranty period of up to fifteen months. The Company records provisions for product warranties as a component of cost of sales based upon an estimate of the amounts necessary to settle existing and future claims on products sold. The historical relationship of warranty costs to products sold is the primary basis for the estimate. A significant increase in third party service repair rates, the cost and availability of parts or the frequency of claims could have a material adverse impact on the Company’s results for the period or periods in which such claims or additional costs materialize. Management reviews its warranty exposure periodically and believes that the warranty reserves are adequate; however, actual claims incurred could differ from original estimates, requiring adjustments to the reserves. In one such review during fiscal 2003, the Company’s results of operations were adversely impacted by an additional charge of approximately $570,000 related to endoscope reprocessing equipment due to a component failure which required warranty service to many endoscope reprocessing units in the field. Management believes this situation was fully remedied in fiscal 2003.

Costs Associated with Exit or Disposal Activities

The Company recognizes costs associated with exit or disposal activities, such as costs to terminate a contract, the exit or

disposal of a business, or the early termination of a leased property, by recognizing the liability at fair value when incurred, except for certain one-time termination benefits, such as severance costs, for which the period of recognition begins when a severance plan is communicated to employees.

Inherent in the calculation of liabilities relating to exit and disposal activities are significant management judgments and estimates, including estimates of termination costs, employee attrition, future sublease revenues, vacancy periods, tenant improvement allowances, and the interest rate used to discount certain expected net cash payments. Such judgments and estimates are reviewed by the Company on a regular basis. The cumulative effect of a change to a liability resulting from a revision to either timing or the amount of estimated cash flows is recognized by the Company as an adjustment to the liability in the period of the change.

Although the Company has historically recorded minimal charges associated with exit or disposal activities, the Company believes that certain exit costs, including severance, will be incurred in the future related to the expiration of Carsen’s Olympus Agreements.

Legal Proceedings

In the normal course of business, the Company is subject to pending and threatened legal actions. The Company records legal fees and other expenses related to litigation as incurred. Additionally, the Company assesses, in consultation with its counsel, the need to record a liability for litigation and contingencies on a case by case basis. Amounts are accrued when the Company, in consultation with counsel, determines that a liability has been incurred and an amount of anticipated exposure can be reasonably estimated.

Income Taxes

The Company recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities also include items recorded in conjunction with the purchase accounting for business acquisitions. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance, if necessary, based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. Although realization is not assured, management believes it is more likely than not that the recorded deferred tax assets will be realized. Additionally, deferred tax liabilities are regularly reviewed to confirm that such amounts are appropriately stated. Such a review considers known future changes in various effective tax rates, principally in the United States. If the United States effective tax rate were to change in the future, the Company’s items of deferred tax could be materially affected. All of such evaluations require significant management judgments.

It is the Company’s policy to establish reserves for possible exposures as a result of an examination by tax authorities. The

• the distribution agreements between Olympus and the Company’s Carsen Group subsidiary will expire on July 31, 2006 and will not be renewed or extended thereafter, resulting in the loss of a significant portion of the Company’s net sales, operating income and net income after July 31, 2006. See Part I, Item 1. - Note 14 and Management’s Discussion and Analysis of Financial Condition and Results of Operations above.

• an increasing market share of single-use dialyzers relative to reuse dialyzers. A decrease in dialyzer reuse in the United States in favor of single use dialyzers could have a material adverse effect on the Company’s business.

• the impact of consolidation of dialysis providers (i.e., large chains are increasingly buying other chains and independents). The consolidation of dialysis providers could result in a reduction in the Company’s net sales due to reduced average selling prices of dialysis products.

• short-term nature of the Company’s MediVators Agreement with Olympus. This agreement expires by its terms on August 1, 2006 and the Company is currently uncertain whether it will extend the agreement, seek a new third party distributor, or directly undertake the distribution function after August 1, 2006.

• the Company’s growth is dependent in part on acquiring new businesses. There can be no assurance that the Company will be successful in identifying and acquiring businesses.

• the Company’s ability to successfully integrate and operate acquired and merged businesses and the risks associated with such businesses.

• the development and acceptance of the Company’s new products.

• the impact of competitive products and pricing.

• the ability to keep pace with technological advances.

• relationships with key suppliers and key customers.

• foreign currency and interest rate fluctuations.

• changes in international, national or local economic conditions.

• changes in government regulation.

• the availability of adequate insurance coverage at a reasonable cost.

Consequently, readers should not consider the foregoing items to be a complete list of all potential risks or uncertainties. All

dollar affect the Company’s results of operations because a portion of the net assets of Minntech’s Netherlands subsidiary are denominated and ultimately settled in United States dollars but must be converted into its functional euro currency. Additionally, financial statements of the Netherlands subsidiary are translated using the accounting policies described in note 2 to the Consolidated Financial Statements included within the Company’s 2004 Form 10-K. Fluctuations in the rates of currency exchange between the European Union and the United States had an overall adverse impact for the three and nine months ended April 30, 2005, compared with the three and nine months ended April 30, 2004, upon the Company’s results of operations, and had a positive impact upon stockholders’ equity, as described in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In order to hedge against the impact of fluctuations in the value of the euro relative to the United States dollar, Minntech enters into short-term contracts to purchase euros forward, which contracts are generally one month in duration. These short-term contracts have been designated as fair value hedge instruments. There was one such foreign currency forward contract amounting to €3,030,000 at April 30, 2005 which covered certain assets and liabilities of Minntech’s Netherlands subsidiary which are denominated in United States dollars. Such contract expired on May 31, 2005. Under its U.S. Credit Facilities, such contracts to purchase euros may not exceed $12,000,000 in an aggregate notional amount at any time. During the three and nine months ended April 30, 2005, such forward contracts were effective in offsetting the adverse impact of the strengthening of the euro on the Company’s results of operations.

The functional currency of Minntech’s Japan subsidiary is the Japanese yen. Changes in the value of the Japanese yen relative to the United States dollar during the three and nine months ended April 30, 2005 and 2004 did not have a significant impact upon either the Company’s results of operations or the translation of the balance sheet, primarily due to the fact that the Company’s Japanese subsidiary accounts for a relatively small portion of consolidated net sales, net income and net assets.

Interest rate market risk

The Company has two credit facilities for which the interest rate on outstanding borrowings is variable. Therefore, interest expense is principally affected by the general level of interest rates in the United States and Canada. During the three and nine months ended April 30, 2005, all of the Company’s outstanding borrowings were under its U.S. Credit Facilities.

Market risk sensitive transactions

Additional information related to market risk sensitive transactions is contained in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Company’s 2004 Form 10-K.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CANTEL MEDICAL CORP.

Date: June 9, 2005

	By:	/s/ James P. Reilly
		James P. Reilly, President
		and Chief Executive Officer
		(Principal Executive Officer)


	By:	/s/ Craig A. Sheldon
		Craig A. Sheldon,
		Senior Vice President and
		Chief Financial Officer (Principal
		Financial and Accounting Officer)


	By:	/s/ Steven C. Anaya
		Steven C. Anaya,
		Vice President and Controller

ITEM 1.	LEGAL PROCEEDINGS

	See Part I, Item 1. - Note 13 above.

ITEM 6.	EXHIBITS

	31.1	-	Certification of Principal Executive Officer.

	31.2	-	Certification of Principal Financial Officer.

	32	-	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

CONDENSED CONSOLIDATED BALANCE SHEETS

Results of Operations

Critical Accounting Policies

Revenue Recognition

Inventories

Warranties

Business Combinations

Other Matters